[Photo: Etienne Martin/Unsplash]When the movement to push the city of Los Angeles from keeping its money at Wells Fargo grew in 2017–as in other cities that decided to pull money from the bank because of its fake accounts scandal and funding of the Dakota Access Pipeline–organizers of the campaign realized that they faced a challenge: Where to put the money next.

The largest city accounts are too big for small community banks to handle, so divestment from one major bank typically means moving money to another major bank that likely has social responsibility issues of its own. In addition, even ethical smaller banks aren’t directly accountable to the public. L.A., along with other U.S. cities, is now considering another option: a public, city-owned bank that would keep money inside the community, and follow a socially and environmentally responsible charter.

“This started as a divest campaign,” says Phoenix Goodman, cofounder and policy director for the activist group Revolution LA, which runs both Divest LA and Public Bank LA. “I was tasked with doing research on alternatives and what that would entail financially, and in looking into it, I realized, wait a minute, we have so much money that the only other banks that can handle our accounts are other huge Wall Street firms, all of which are complicit in this same system, more or less. Maybe Wells Fargo is the most egregious, but in a way it’s a smaller victory, because we’re just going to move to another big bank, and we’re not changing the system, we’re changing a symptom of the system.”

A public bank, they realized, could be designed to bar unethical business practices. It could also save the city money. Los Angeles, for example, paid private banks more than $100 million in fees in 2016. Instead of taking out loans for infrastructure projects from major banks, and sending fees and interest outside the city, a public bank could handle the city’s needs itself. Public banks can be set up to hold government deposits and give loans to the government and work as a “banker’s bank” for smaller community banks; in another model, they can also be set up to take consumer deposits. The initial capitalization can come from a variety of sources, including long-term investments, bonds, and crowdfunding.

“That’s our tax dollars that get siphoned off to profits on Wall Street,” Goodman says. “If that same mechanism can be owned by the people themselves within the city, that interest can be reinvested as profits for the bank to be used and reinvested again into new projects, so it would be profit for the city rather than private interests. Because it can save money, fiscally conservative people have found value in that as well.”

In the U.S., at the moment, only one public bank exists: The Bank of North Dakota. “The whole idea of the Bank of North Dakota, when it was set up in 1919, was to keep North Dakota money in North Dakota for North Dakotans,” says Ellen Brown, an attorney and founder of the nonprofit Public Banking Institute. Her interest in the model was piqued after the 2008 financial crisis. As Wall Street banks collapsed and most state treasuries went into debt, the Bank of North Dakota grew assets and profits because the model, Brown says, is more efficient than traditional banking.

Several cities are now considering the idea, driven in part by the same divestment movement at work in Los Angeles. Santa Fe, New Mexico, which began working on the concept earlier than most, completed a feasibility study in 2016. Washington, D.C. has money allocated in the 2018 budget for a feasibility study. Seattle and Portland are considering the idea. Oakland is beginning a feasibility study, and a grassroots group of advocates is raising money for a business plan, the next step in the process. San Francisco is also pursuing the idea. New Jersey’s new governor talked about his support for a state public bank as he campaigned (a state bank would work in a similar way, and could also work in conjunction with city banks).

In California, marijuana legalization is providing another push for public banks. Other banks won’t give dispensaries accounts because of discrepancies with federal law. “The whole situation is ridiculous,” says Susan Harmon, an advocate with Friends of the Public Bank of Oakland. “It’s absurd. The cannabis industry in Oakland pays taxes to the city in cash. They deliver huge bags of cash in armored cars to the city.” Harmon says that it takes city staff five hours to count taxes from Harborside, one large dispensary.

Once the city takes the cash to Chase, the bank can accept it; having a city-owned bank would remove the need to use cash at all. “The DOJ hasn’t come down on Chase for money laundering,” Harmon says. “So there’s something about the magic hand of government touching this cash that launders it, in a good way. It somehow cleans it up and makes it respectable, and lets Chase accept it as a deposit, even though they wouldn’t if Harborside went directly to Chase to try to open an account.”

The problem of weed money will only grow, since recreational marijuana is now legal in California, as of 2018, along with medical marijuana. In 2017, the state treasurer said that the state should begin considering public banks as one option to deal with the hundreds of millions in cash that will be due in taxes.

In L.A., organizers say that while they support the idea of using public banks for cannabis money, the idea can move forward with or without cannabis. A task force looked at the legal requirements for a public bank, potential regulatory barriers, and financial benefits and risks, and found the idea feasible on the surface; a next step will be a more detailed examination.

If it works, the city would also have to create a governance model to make the bank responsible. A charter might outline, for example, that profits will be reinvested for the public benefit, and list sectors that would be restricted from investment, such as fossil fuels and private prisons, along with sectors that would be prioritized in line with the city’s goals, such as affordable housing and community land trusts. Bank policy could also limit executive pay and require governance from a board with expertise in issues like sustainable development.

“You can technically have a public bank that is still propped or beholden to the wrong interests, or incompetently run,” says Goodman. “A public bank is not enough. It’s just one pillar of the system that we’re trying to create–one [pillar] is that it’s public. Two is that it’s beholden to the people in a transparent way, completely barred from unethical business practices and encouraged to follow socially and environmentally responsible business practices.”

Goodman and other advocates are also in talks with legislators in Sacramento, pushing for a bill that would create a regulatory framework for public banks in the state as a whole. It’s a step that isn’t necessary, but would help city banks in the state work together in a more coordinated way. The biggest barrier, he says, is getting people to realize that another model is possible. “I think all we need is one victory,” he says. “We think Los Angeles could be the first. I think it’s going to be a chain reaction.”

New Jersey could also potentially move quickly, says Brown. The state’s recently elected governor, Phil Murphy, who talked about his support for public banks in his campaign, previously worked at Goldman Sachs. That understanding of the banking industry–and the fact that his background at such a lucrative institution might persuade some voters that government-owned bank could be well-run–could be key.

“It seems to me that the big issue is political will,” Brown says. “Any state or city could do it if they had the political will. But the problem is overcoming this resistance from politicians and from big banks, who will say things like ‘politicians should not be bankers.’ The politicians aren’t going to be the bankers; you’re going to hire the best bankers you can find, of course.”

If it succeeds, the model could reshape the larger financial system. “What we’re basically changing is the relationship between private financial firms and public entities like state and city governments,” says Goodman. “By changing that relationship, we can have a tangible effect on the entire economy as a whole. Because everything emerges from banking. Every single thing needs funding, so the source of that funding will determine everything else that unfolds in the economy.”

The Portland Public Banking Alliance, which advocates for a more equitable economy, has been pushing for a public bank for about two years. “Public banking is really taking off and there are efforts, particularly in California and in a number of places,” says the Alliance’s David E. Delk.

Delk says there are several good reasons that Portland should consider a public bank. He says the model would give the city more control over its finances, and allow it to avoid using local resources to assist the “too big to fail” banks that caused the great recession. He notes that he’d rather see banking benefit locals rather than Wall Street.

“My hope is that a public bank would be a profit-making institution except the profit would be for public purposes,” Delk says, naming everything from addressing homelessness and affordable housing, to creating jobs and retrofitting homes to be more energy efficient. “The possibilities are limited really only by our imagination because the needs are so great.”

The Alliance imagines that the public bank would also partner with local credit unions and community development financial institutions (CDFIs) to provide loans to students for college.

Commissioner Chloe Eudaly, who was elected to Portland’s City Council in 2016, has expressed an interest in investigating how the city might be able to establish a bank.

“We have one other person on the City Council who has made a supportive statement but we’re not really sure if it came down to casting a vote, whether he would actually be with us or not,” Delk says.

Marshall Runkel, Eudaly’s chief of staff, told the Portland Mercury he has been looking into public banks and has asked the city attorney about the matter. The city attorney’s initial stance was that establishing a public bank would violate the Oregon state constitution, which prohibits state banks.

Delk says the Portland Public Banking Alliance got a different opinion from another attorney and is awaiting a response from the city attorney’s office based on that feedback.

Establishing a public bank could take years — Delk estimates about five, “if all runs smoothly” — and will require securing funds for a feasibility study, conducting the study and then actually putting the bank in place. Delk says the Portland Public Banking Alliance plans to do more outreach in 2018 to raise awareness, and to discuss a public bank with all future City Council candidates.

A report from The City’s Budget Analyst determined that if San Francisco were to establish a public bank, the financial benefits could create more funding for loans for affordable housing projects, small businesses and low-income households. (Jessica Christian/S.F. Examiner)

San Francisco could become the first city in the nation to launch a public bank.

Supervisors Malia Cohen and Sandra Fewer are advancing the idea of establishing a municipal bank, which would end The City’s use of profit-driven large national commercial banks for banking services.

The only public bank in the U.S. is the state-owned and operated Bank of North Dakota, which dates back to 1919 and remains profitable. But others may at last follow suit as Wall Street financial institutions are coming under increased criticism for banking practices and investments in fossil fuels.

Public banks are also gaining traction in the era of legalized recreational cannabis. Those in the cannabis business are unable to use banks since the drug remains illegal under federal law.

“This ongoing public banking discussion is coming at an important moment in our community,” Cohen said last week. “This month, the San Francisco Retirement Board is expected to finally discuss the vote on fossil fuel divestment. This week, in Washington, the Trump administration is working to diminish the power of the Consumer Financial Protection Bureau, thus limiting the oversight of big banks on Wall Street.”

Cohen continued, “In our long cannabis discussion, we have barely acknowledged that cannabis is currently an all-cash business — cash payroll, no banking, vaults of bills on the floors of retailers.”

Last month, California Treasurer John Chiang recommended studying opening a state bank for those in the cannabis industry to open bank accounts and pay taxes.

With the passage of Proposition 64 last year, recreational cannabis becomes legal on Jan. 1. The industry is expected to have more than $7 billion in sales and an estimated $1 billion in tax revenues.

“It is unfair and a public safety risk to require a legal industry to haul duffle bags of cash to pay taxes, employees and utility bills,” Chiang said in a Nov. 7 statement. “The reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”

Eleven other states or cities — including Santa Fe, Oakland, Philadelphia, Vermont and New Hampshire — have proposed or are studying public banks of their own.

The benefits for San Francisco were identified in a new Budget Analyst report requested by Fewer and released last week. Unlike private banks, a public bank is not motivated by profit, which means lower interest rates on loans. The return of profits would go back to The City, not shareholders, and it could mean lower costs for capital projects, which are usually funded by issuing debt through private banks.

The report said that a public bank could make more funds available for affordable housing loans and to support small business development, as well as loans to low-income households.

“Funds in the municipal bank could also be loaned and used as funding sources for city housing and infrastructure projects at lower financing costs than if such projects were to rely on debt issued through commercial banks,” the report found.

Fewer emphasized how a public bank would ensure more social responsibility with the investment of public funding, such as not having money invested with financial institutions financing the Dakota Access Pipeline for oil transport, a project opposed by Native American and environmental groups.

The report also confirmed that San Francisco has the legal authority to establish a public bank, according to the City Attorney’s Office, although it “would likely take a few years to have a city municipal bank fully up and running and able to serve as the primary financial institution for The City’s banking needs.”

The report suggested a municipal bank could launch with “its initial equity and making loans in its first year” and then “gradually build up its assets as loans are repaid with interest and new loans are originated.”

“Within a few years, the municipal bank should be able to generate sufficient revenue to be able to cover its costs and serve as the primary financial institution for The City,” the report said.

Fewer and Cohen requested a hearing last week on the report’s findings, which is expected to occur early next year in conjunction with the formation of a municipal bank city task force. The task force was called for in a resolution introduced by Cohen and approved by the Board of Supervisors in April.

While large commercial banks do offer loans to small businesses and support affordable housing, since it’s not their primary business, and San Francisco is a small part of their overall market, The City could do better to maximize use of city funds.

The application process to serve on the task force, which is under the jurisdiction the Office of Treasurer and Tax Collector Jose Cisneros, was expected to begin Dec. 1 with a Dec. 22 deadline to apply.

Even without a public bank, The City is trying to improve its banking practices.

The tax collector, which does all the banking and investment activities for The City, has also hired a new staff member who begins employment Monday to help study a public bank option and examine other investment strategies.

In October, Cisneros started a new program that could result in up to $80 million in city funds being invested in San Francisco-based banks, credit unions, and community development banks within a year, the report said. These financial services “are more consistent with serving underserved residents and community development initiatives.”

A public bank would allow the The City to increase its existing financial services provided for residents. Last fiscal year, The City spent $3.7 million on financial services for “underserved populations” — including $1.5 million for Kindergarten to College, a college savings program, and $832,000 for “smart money” coaching — and $756,000 in technical assistance services to small businesses, the report said.

The cannabis industry operates mostly in cash since financial institutions are obligated by the Bank Secrecy Act of 1970 to report suspicious activity, including marijuana financial activity. The drug remains illegal under federal law.

The report suggests the board “request an opinion from the City Attorney’s Office on legal issues regarding serving the marijuana industry” through a public bank.

The task force, which is expected to be established in late January, is charged with issuing a report within six months, including cost estimates of establishing a public bank, staffing needs and how to provide banking services for the cannabis industry.

SANTA FE – One thing was clear from a public forum held by the city of Santa Fe’s Public Bank Task Force, formed to research and identify barriers to forming a public bank: It won’t be easy.

On Monday, the task force presented findings so far made by four subcommittees addressing legal issues, regulations, capitalization and governance of a proposed public bank, then heard comments and questions from about a dozen of the 40 or so people present. Several of them expressed doubts about the viability of a public bank – a bank owned, operated and funded by a government entity.

While the subcommittees laid out many of the challenges the city would face if it were to form a public bank, one in which the city, at least initially, would be the only client, some skeptics in the audience raised other concerns.

Citing a recent audit that showed the city was susceptible to fraud and theft and an audit in 2015 that determined $2 million of a $30 million parks bond was misspent, Berl Brechner said the city should abandon the idea altogether.

“This process has gone farther than it should have,” he said.

A city-financed feasibility study done last year determined that a public bank could potentially improve fiscal management, create a healthier local lending climate and generate better interest rate margins for the city. Earlier this year, the City Council passed a resolution to form the task force to assist the council in making an informed decision about the city applying for a bank charter through the state.

But it’s not clear whether that’s even possible. As the regulatory subcommittee observed, there’s uncertainty over whether the bank would violate the state’s anti-donation clause, which prohibits a government from lending its credit. That committee also noted that the FDIC had concerns about issuing deposit insurance to a domestic governmental unit.

While the committee did not respond to Brechner’s comment, the next speaker did.

Charles Koenig said the Bank of North Dakota, one of the few public banks in America, has turned a profit every year since in was formed in 1919. And the profits didn’t go bankers or anyone on Wall Street, he said.

“If we can establish a public bank in Santa Fe, we can generate profits for the city,” he said.

The task force will present its findings to the Finance Committee on Dec. 4. A final report will be submitted to the City Council early next year.

SANTA FE, N.M. — Already halfway through its six-month exercise to examine what next steps need to be taken to establish a public bank in Santa Fe and identify potential barriers, the Public Bank Task Force will hold a public forum on Monday to gather input to be included in an interim report that will be presented to the City Council’s Finance Committee on Dec. 4.
The council passed a resolution earlier this year to establish the nine-member task force so the council can “make an informed decision about submitting an application for a New Mexico Bank Charter for a Public Bank in Santa Fe,” but the idea has been in the works for a few years.

In September 2014, WeArePeopleHere!, a nonprofit group that describes itself as “a grass-roots progressive political action collective,” put on a symposium hosted by Mayor Javier Gonzales exploring the concept of creating a city-owned community bank.

A few months later, the City Council approved a $50,000 contract to conduct a feasibility study that ultimately determined a public bank could potentially improve fiscal management, create a healthier local lending climate and generate better interest rate margins for the city. But some critics are skeptical of the idea and whether a small city like Santa Fe can make a public bank work.

At least initially, the city would be the public bank’s only client. The report said the bank could serve the city by funding capital improvement projects with internal funds without raising taxes or using bond proceeds.

According to a news release, David Buchholtz, an attorney with experience in finance and banking who serves as the task force’s chairman, will provide an update on the committee’s progress to date, and four subcommittees will report on what’s been learned so far, address ongoing research and legal issues, banking regulations, public bank capitalization and governance. But the majority of the 2½-hour meeting will be devoted to “questions and an open dialogue with members of the public about what they would like a Public Bank to achieve for our community.”

The forum will take place from 5:30 to 8 p.m. Monday in the City Council chambers at City Hall.

Whether there will someday be a Public Bank of Santa Fe was not decided Monday night, but concerned community members got an earful of the myriad regulatory and capitalization hurdles that must be resolved or further studied before such an initiative — or even an application for one — could move forward.

At a forum in City Hall, the city’s Public Bank Task Force reported on its ongoing investigation into whether the city should establish a chartered public bank, presenting an unvarnished view of the potential stumbling blocks they have intensively researched since August.

Many of the roughly 40 community members in attendance might have hoped for more validation of their interest in the idea, one advocates say could reduce debts and generate income for the city while removing the necessity of outside banking giants.

But the task force progress report came in shades of gray, revealing the path to a prospective public bank is cluttered with potential obstacles and concerns requiring more clarity, from whether the city has the statutory authority to establish a public bank, to whether some functions of a municipal public bank would violate the state’s anti-donation clause, to whether the city has enough money available to get a bank off the ground.

“The city has to have the unrestricted liquidity to make this work,” said Randolph Hibben, a task force member with experience in community banking. “I don’t believe it does.”

Many aspects of the public bank proposition have not yet been determined, including how its independent governance would be established; how it might be staffed, operated and governed; and whether its functions might be limited to the city and other public institutions or might be expanded into a broader community model. These and other regulatory concerns remain to be studied further, task force members said.

“We’re deep into it,” said David Buchholtz, an Albuquerque attorney who chairs the panel. “Do we have all of our answers yet? Probably not.”

Tasked with identifying the pros and cons of a public bank and then delivering “the information needed to make an informed decision” to the City Council in early 2018, the nine-member volunteer task force recommended by Mayor Javier Gonzales and approved by the council has met regularly since August.

Monday’s forum marked the first wide-ranging checkup on the progress made by the advisory panel and its various subgroups.

Their work follows a feasibility study authorized by the City Council in 2014 and completed early last year.

That analysis determined the city could save money if a public bank were established but cautioned any initiative ought to start small and emphasize transparency.

Whether the task force is expected to deliver to councilors a recommendation one way or the other or simply a report on their analyses is unclear. Buchholtz said he would seek clarity from councilors on the Finance Committee in December.

BREAKING: Phil Murphy wins New Jersey’s governor’s race. But it’s not only a win for Murphy, it’s also a win for Public Banks. As John Nichols of The Nation put it today, “Public banking is on the ballot today—not as the sort of statewide referendum issue … but in the form of a candidate who knows a thing or two about banking.”

Phil Murphy describes Public Banking as “the type of big thinking we need to get back on track.” He wants to do even more with a NJ state bank than the successful model of the Bank of North Dakota. “This is money that belongs to the taxpayers of New Jersey, so it should be invested in them.”

PBI’s Chair Emeritus Walt McRee says,

“Phil Murphy has distinguished himself not only in the race for New Jersey governor, but nationally as well with a policy innovation actually capable of turning the state’s economy around.”

Murphy’s win, as John Nichols says, could lead to a different way of talking about economic renewal nationally. PBI believes public banking is a non-partisan issue — conservatives and liberals alike embrace it as a solution for many of the problems facing our country. We are encouraged that so many candidates for office are putting Public Banking on their platform.

California Treasurer John Chiang wants the state to consider creating a government-owned bank that could serve cannabis businesses, one of several recommendations aimed at helping bring those businesses into the financial mainstream.

The recommendations, the product of a year of meetings of a cannabis working group organized by Chiang’s office, suggest there may be ways for California to help cannabis businesses pay their taxes and open bank accounts. But they also illustrate that the relationship between banks and marijuana companies will remain tenuous unless federal laws are changed.

Indeed, along with looking into the creation of a public bank, another of the recommendations from Chiang’s group is to form a multistate group to lobby Congress to ease federal restrictions on cannabis.

“A definitive, bulletproof solution will remain elusive” without federal deregulation, Chiang said at a news conference Tuesday announcing the recommendations. “That is not an excuse for inaction.”

Last year, in the wake of the passage of Proposition 64, which legalizes marijuana for recreational use, Chiang created a working group of public officials, bankers and cannabis companies with the aim of addressing a vexing problem for the pot industry: Even in states where cannabis is legal, companies that grow or sell the plant are often unable to open bank accounts.

Despite guidelines that suggest banks can accept money from cannabis businesses, marijuana remains an illegal substance under federal law and banks answer to federal regulators, making the vast majority of financial institutions unwilling to work with marijuana companies.

Over the last year, Chiang’s group held public meetings around the state, hearing from cannabis companies about how the de facto banking ban affects them, from banks about their concerns and from public officials about the side effects of a bankless industry — notably having to accept tax payments made with duffel bags full of cash.

The group’s final report, released Tuesday, makes four recommendations aimed at addressing the issue, though the report acknowledges they are stopgap measures. Cannabis business owners called the recommendations useful but incremental at best.

One recommendation, which was promoted by many in the cannabis industry as well as social justice groups, is that the state look into the creation of a public bank. A bank owned by the state of California, the thinking goes, could provide banking services to cannabis companies and also offer an alternative to profit-driven Wall Street institutions.

There are numerous obstacles to creating such a bank, including the potential cost to the state and lingering questions about whether such an entity would be able to serve the cannabis industry. Tuesday’s report does not call for the creation of a public bank, but rather suggests the state should study the idea.

Chiang said he and the state attorney general’s office will start such a study soon.

To help local agencies collect marijuana tax payments, and to reduce the risk that cannabis business owners take by transporting tax payments in cash, the report recommends that the state hire armored car services to pick up tax payments from businesses.

That cash would be deposited at banks — on behalf of the state, not the cannabis businesses. Chiang, who is running for governor of California, called it “a simple and elegant strategy” that would help address a long-running concern for governments and business owners.

Dan Grace, chief executive of Oakland’s Dark Heart Nursery, which supplies commercial cannabis growers, said being able to pay taxes without hauling cash to government offices would be helpful — but only to a point.

“My payments to the government are at most one quarter of my monthly payments, so that still leaves everything else,” he said. “It still doesn’t solve the issue in a meaningful way.”

To help banks feel more comfortable working with marijuana businesses, the report recommends that state and local agencies that regulate those cannabis businesses should make information about the businesses available to financial institutions.

Under current federal guidelines, banks that accept deposits from cannabis businesses are required to certify that those businesses are not selling to minors, affiliated with organized crime or breaking a handful of other rules — a tricky task that has the effect of keeping most banks out of the industry.

Tuesday’s report suggests that if banks had access to state and local regulatory information about cannabis businesses, it would help banks feel more comfortable about working with those businesses.

Grace said such a system might be helpful and that state cannabis business licenses — which will be issued starting next year — should also make banks feel more comfortable working with cannabis companies.

“One thing we do frequently hear from bank compliance officers is that it’s hard to meet the regulatory standards because they have to ensure we’re conforming to state and legal regulations,” he said. “Right now, that’s a high bar to meet since we still don’t have state licensing.”

Finally, the report calls for the creation of a consortium of state and local governments in states where marijuana is legal, with the goal of making sure “cannabis-legal states speak with one voice” in lobbying for changes to federal law.

Phil Murphy, a former banker with a double-digit lead in New Jersey’s race for governor, has made a state-owned bank a centerpiece of his platform. If he wins on November 7, the nation’s second state-owned bank in a century could follow.

More than three-quarters of the MPs surveyed incorrectly believed that only the government has the ability to create new money. . . .

The Bank of England has previously intervened to point out that most money in the UK begins as a bank loan. In a 2014 article the Bank pointed out that “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

The Bank of England researchers said that 97% of the UK money supply is created in this way. In the US, the figure is about 95%. City A.M. quoted Fran Boait, executive director of the advocacy group Positive Money, who observed:

“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are shockingly ignorant of where money actually comes from.

“There is in fact a ‘magic money tree’, but it’s in the hands of commercial banks, such as Barclays, HSBC and RBS, who create money whenever they make loans.”

For those few politicians who are aware of the banks’ magic money tree, the axiom that the people should own the banks – or at least some of them – is a no-brainer. One of these rare politicians is Phil Murphy, who has a double-digit lead in New Jersey’s race for governor. Formerly a Wall Street banker himself, Murphy knows how banking works. That helps explain why he has boldly made a state-owned bank a centerpiece of his platform. He maintains that New Jersey’s billions in tax dollars should be kept in the state’s own bank, where it can leverage its capital to fund local infrastructure, small businesses, affordable housing, student loans, and other state needs. New Jersey voters go to the polls on November 7.

That means New Jersey could soon have the second publicly-owned depository bank in the country, following the very successful century-old Bank of North Dakota (BND). Other likely contenders among about twenty public banking initiatives now underway include Washington State, which has approved a feasibility study for a state bank; and the cities of Santa Fe in New Mexico and Los Angeles and Oakland in California, which are exploring the feasibility of their own city-owned banks.

A Bank Is Not Simply an Intermediary

An article in City Watch LA critical of the idea of a city-owned bank observed that Los Angeles formerly had a bank that failed, closing its doors in 2003 due to insolvency. The argument illustrates the confusion over what a bank is and what it can do for the local government and local communities. The Los Angeles Community Development Bank was not a bank. It was a loan fund, and it was designed to fail. It was not chartered to take deposits or to create deposits as loans, and it was only allowed to lend to businesses that had been turned down by other banks; in other words, they were bad credit risks.

With a loan fund, a dollar invested is a dollar lent, which must return to the bank before it can be lent again. By contrast, as the Bank of England acknowledged in its 2014 paper, “banks do not act simply as intermediaries, lending out deposits that savers place with them.” A chartered depository bank can turn one dollar of capital into ten dollars in bank credit, something it does simply by creating a deposit in the account of the borrower. If the bank’s books don’t balance at the end of the day, it borrows very cheaply from other banks, the Federal Home Loan Banks, or the repo market. It borrows at bankers’ rates rather than retail rates, and that is one of the many perks that a publicly-owned bank can recapture for local governments. Borrowing from banks rather than the bond market actually expands the circulating money supply, stimulating the local economy.

Compelling Precedents

Public sector banks, while rare in the US, are common in other countries; and recent studies have shown that they are actually more profitable, safer, less corrupt, and more accountable overall than private banks.

This is particularly true of the Bank of North Dakota, currently the only publicly-owned depository bank in the US. According to the Wall Street Journal, it is more profitable than Goldman Sachs or JPMorgan Chase. The BND is risk-averse, lends conservatively, does not gamble in derivatives or put deposits at risk. It is able to lend at lower than market rates because its costs are very low.

The BND holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. It has seen record profits for almost 15 years. It continued to report record profits after two years of oil bust in the state, showing that it is highly profitable on its own merits because of its business model. It does not pay bonuses, fees, or commissions; has no high paid executives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which either distributes them as dividends to the state or uses them to build up its capital base in order to expand its loan portfolio.

The BND does not compete but partners with local banks, which act as the front office dealing with customers. It does make loans that community banks are unable to service, but this is not because the borrowers are bad credit risks. It is because either the loans are too big for the smaller banks to handle by themselves or the smaller banks cannot afford the regulatory burden of lending in rural communities where they get only a few loans a year.

Among other cost savings, the BND is able to make 2% loans to North Dakota communities for local infrastructure — half or less the rate paid by local governments in other states. The BND also lends to state agencies. For example, in 2016 it extended a $200,000 letter of credit to the State Water Commission at 1.75% and a $56,000 loan to the Water Commission to pay off its bond issues. Since 50% of the cost of infrastructure is financing, the state can cut infrastructure costs nearly in half by financing through its own bank, which can return the interest to the state.

If Phil Murphy wins the New Jersey governorship and succeeds in establishing a New Jersey state-owned bank, expect a wave of public banks to follow, as more and more elected officials come to understand how banking works and to see the obvious benefits of establishing their own.

Crushing regulations are driving small banks to sell out to the megabanks, a consolidation process that appears to be intentional. Publicly owned banks can help avoid that trend and keep credit flowing in local economies.

At his confirmation hearing in January 2017, Treasury Secretary Stephen Mnuchin said, “regulation is killing community banks.” If the process is not reversed, he warned, we could “end up in a world where we have four big banks in this country.” That would be bad for both jobs and the economy. “I think that we all appreciate the engine of growth is with small and medium-sized businesses,” said Mnuchin. “We’re losing the ability for small- and medium-sized banks to make good loans to small and medium-sized businesses in the community, where they understand those credit risks better than anybody else.”

The number of U.S. banks with assets under $100 million dropped from 13,000 in 1995 to under 1,900 in 2014. The regulatory burden imposed by the 2010 Dodd-Frank Act exacerbated this trend, with community banks losing market share at double the rate during the four years after 2010 as in the four years before. But the number had already dropped to only 2,625 in 2010. What happened between 1995 and 2010?

Six weeks after Sept. 11, 2001, the 1,100 page Patriot Act was dropped on congressional legislators, who were required to vote on it the next day. The Patriot Act added provisions to the 1970 Bank Secrecy Act that not only expanded the federal government’s wiretapping and surveillance powers but outlawed the funding of terrorism, imposing greater scrutiny on banks and stiff criminal penalties for non-compliance. Banks must now collect and verify customer-provided information, check names of customers against lists of known or suspected terrorists, determine risk levels posed by customers, and report suspicious persons, organizations and transactions. One small banker complained that banks have been turned into spies secretly reporting to the federal government. If they fail to comply, they can face stiff enforcement actions, whether or not actual money-laundering crimes are alleged.

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In 2010, one small New Jersey bank pleaded guilty to conspiracy to violate the Bank Secrecy Act and was fined $5 million for failure to file suspicious-activity and cash-transaction reports. The bank was acquired a few months later by another bank. Another small New Jersey bank was ordered to shut down a large international wire transfer business because of deficiencies in monitoring for suspicious transactions. It closed its doors after it was hit with $8 million in fines over its inadequate monitoring policies.

Complying with the new rules demands a level of technical expertise not available to ordinary mortals, requiring the hiring of yet more specialized staff and buying more anti-laundering software. Small banks cannot afford the risk of massive fines or the added staff needed to avoid them, and that burden is getting worse. In February 2017, the Financial Crimes Enforcement Network proposed a new rule that would add a new category requiring the flagging of suspicious “cyberevents.” According to an April 2017 article in American Banker:

[T]he “cyberevent” category requires institutions to detect and report all varieties of digital mischief, whether directed at a customer’s account or at the bank itself. …

Under a worst-case scenario, a bank’s failure to detect a suspicious [email] attachment or a phishing attack could theoretically result in criminal prosecution, massive fines and additional oversight.

One large bank estimated that the proposed change with the new cyberevent reporting requirement would cost it an additional $9.6 million every year.

Besides the cost of hiring an army of compliance officers to deal with a thousand pages of regulations, banks have been hit with increased capital requirements imposed by the Financial Stability Board under Basel III, eliminating the smaller banks’ profit margins. They have little recourse but to sell to the larger banks, which have large compliance departments and can skirt the capital requirements by parking assets in off-balance-sheet vehicles.

In a September 2014 article titled “The FDIC’s New Capital Rules and Their Expected Impact on Community Banks,” Richard Morris and Monica Reyes Grajales noted that “a full discussion of the rules would resemble an advanced course in calculus,” and that the regulators have ignored protests that the rules would have a devastating impact on community banks. Why? The authors suggested that the rules reflect “the new vision of bank regulation—that there should be bigger and fewer banks in the industry.” That means bank consolidation is an intended result of the punishing rules.

House Financial Services Committee Chairman Jeb Hensarling, sponsor of the Financial CHOICE Act downsizing Dodd-Frank, concurs. In a speech in July 2015, he said:

Since the passage of Dodd-Frank, the big banks are bigger and the small banks are fewer. But because Washington can control a handful of big established firms much easier than many small and zealous competitors, this is likely an intended consequence of the Act. Dodd-Frank concentrates greater assets in fewer institutions. It codifies into law ‘Too Big to Fail’ … . [Emphasis added.]

Dodd-Frank institutionalizes “too big to fail” by authorizing the biggest banks to “bail in” or confiscate their creditors’ money in the event of insolvency. The legislation ostensibly reining in the too-big-to-fail banks has just made them bigger. Wall Street lobbyists were well known to have their fingerprints all over Dodd-Frank.

Restoring Community Banking: The Model of North Dakota

Killing off the community banks with regulation means killing off the small and medium-size businesses that rely on them for funding, along with the local economies that rely on those businesses. Community banks service local markets in a way that the megabanks with their standardized lending models are not interested in or capable of.

How can the community banks be preserved and nurtured? For some ideas, we can look to a state where they are still thriving—North Dakota. In an article titled “How One State Escaped Wall Street’s Rule and Created a Banking System That’s 83% Locally Owned,” Stacy Mitchell writes that North Dakota’s banking sector bears little resemblance to that of the rest of the country:

With 89 small and mid-sized community banks and 38 credit unions, North Dakota has six times as many locally owned financial institutions per person as the rest of the nation. And these local banks and credit unions control a resounding 83 percent of deposits in the state—more than twice the 30 percent market share that small and mid-sized financial institutions have nationally.

Public banks offer unique benefits to community banks, including collateralization of deposits, protection from poaching of customers by big banks, the creation of more successful deals, and … regulatory compliance. The Bank of North Dakota, the nation’s only public bank, directly supports community banks and enables them to meet regulatory requirements such as asset to loan ratios and deposit to loan ratios. … [I]t keeps community banks solvent in other ways, lessening the impact of regulatory compliance on banks’ bottom lines.

We know from FDIC data in 2009 that North Dakota had almost 16 banks per 100,000 people, the most in the country. A more important figure, however, is community banks’ loan averages per capita, which was $12,000 in North Dakota, compared to only $3,000 nationally. … During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.

The BND has been very profitable for the state and its citizens—more profitable, according to the Wall Street Journal, than JPMorgan Chase and Goldman Sachs. The BND does not compete with local banks but partners with them, helping with capitalization and liquidity and allowing them to take on larger loans that would otherwise go to larger out-of-state banks.

In order to help rural lenders with regulatory compliance, in 2011 the BND was directed by the state legislature to get into the rural home mortgage origination business. Rural banks that saw only three to five mortgages a year could not shoulder the regulatory burden, leading to business lost to out-of-state banks. After a successful pilot program, SB 2064, establishing the Mortgage Origination Program, was signed by North Dakota’s governor on April 3, 2013. It states that the BND may establish a residential mortgage loan program under which the Bank may originate residential mortgages if private sector mortgage loan services are not reasonably available. Under this program a local financial institution or credit union may assist the Bank in taking a loan application, gathering required documents, ordering required legal documents, and maintaining contact with the borrower. At a hearing on the bill, Rick Clayburgh, President of the North Dakota Bankers Association, testified in its support:

Over the past years because of the regulatory burdens our banks face by the passage of Dodd Frank, and now the creation of the Consumer Financial Protection Bureau, it has become very prohibitive for a number of our banks to provide residential mortgage services anymore. We two years ago worked both with the Independent Community Bankers Association, and our Association and the Bank of North Dakota to come up with the idea in this program to help the bank provide services into the parts of the state that really residential mortgaging has seized up. We have a number of our banks that have terminated doing mortgage loans in their communities. They have stopped the process because they cannot afford to be written up by their regulator.

Under the Mortgage Origination Program, local banks get paid what is essentially a finder’s fee for sending rural mortgage loans to the BND. If the BND touches the money first, the onus is on it to deal with the regulators, something it can afford to do by capitalizing on economies of scale. The local bank thus avoids having to deal with regulatory compliance while keeping its customer.

The BND is the only model of a publicly-owned depository bank in the US; but in Germany, the publicly-owned Sparkassen banks operate a network of over 15,600 branches and are the financial backbone supporting Germany’s strong local business sector. In the matter of regulatory compliance, they too capitalize on economies of scale, by providing a compliance department that pools resources to deal with the onerous regulations imposed on banks by the EU.

The BND and the Sparkassen are proven models for maintaining the viability of local credit and banking services. It is time other states followed North Dakota’s lead, not only to protect their local communities and local banks, but to bolster their revenues, escape the noose of Washington and Wall Street, and provide a bail-in-proof depository for their public funds.

North Dakota has a public bank–a bank that has been owned and operated by the people of North Dakota since 1919. Because of the Bank of North Dakota, the state weathered the crisis of 2008 far better than most. North Dakota has not had a single local bank failure in more than 20 years. This documentary, produced by Prairie Public Broadcasting, presents the bank’s history, its current operation, and how it benefits the state.

Would replacing our commodity-based economic model with one that prioritizes human-interest qualify to be called “Sacred Economics?” That’s the name of a book by Ellen’s guest this week, Charles Eisenstein, a highly popular radical re-thinker of the nature of human economy. Eisenstein observes some of the inherent flaws in our economic thinking and reminds us that we are the ones in a position to create new priorities. And co-host Walt McRee speaks with Santa Fe public banking leader Nichoe Lichen of Banking on New Mexico, which this past week saw release of a very positive city feasibility study that supports creating a new city-owned public bank.

Listen to Craig Barnes interview two experts on public banking, Gwen Hallsmith, Executive Director of the Public Banking Institute, and Mike Krauss, a director of the Public Banking Institute and chairman of the Pennsylvania Project–an organization dedicated to the formation of Public Banks at the state and municipal level in Pennsylvania. They recently visited Santa Fe on behalf of We are People Here! to meet and discuss, with Mayor Gonzales, City Councilors, and other civic leaders of Santa Fe, the benefits and the formation of a Public Bank for the City of Santa Fe.